Paper Talk: Your Central Bank Has Feelings

Sometimes I like to enter random words into the NBER working paper database search box, and see what it turns up. Today I searched for “happiness”, and found this random paper that basically talked about macroeconomic conditions and national overall levels of happiness.

Happiness, Contentment, and Other Emotions for Central Banks

At first I thought this paper was going to examine the emotional drivers behind central bank decision-makers, or how national opinions of central banks affected their performance or something like that. I guess I got confused by the title – basically, it examines the relationship between unemployment, inflation, and life satisfaction in Europe. The dataset is quite large – survey information from over 600000 respondents, and the implications are interesting.

I guess I could have predicted that people would be less happy when the unemployment rate rose, but I think the key here is to understand the endogeneity at work, and the value in being able to put a number on this relationship.

The paper makes the interesting assertion that central banks should target aggregate contentment, as it is an emotion that is probably most similar to the economist’s first love, “utility.” Reminds me of the Bhutan government announcing the Gross National Happiness index as a measure of their progress. The paper goes on to assess how contentment fluctuates with macroeconomic indicators. The unemployment rate has a much stronger effect than GDP per capita, to the tune of one to two points lost on life satisfaction for a one-point climb in the unemployment rate.

This would seem natural – if a higher portion of respondents are unemployed, and unemployed people are generally less happy than their gainfully employed peers, one would expect aggregate levels of contentment to go down when the unemployment rate goes up. I am interested in seeing how these numbers would change if we were simply studying man’s concern for his fellow man – do the contentment scores of those who remain forever employed change when the unemployed grow? Essentially, as a nation, do we empathize for our less fortunate counterparts when they fall prey to adverse economic conditions?

I know I’m getting a bit distracted from the real point of the paper, but it’s the type of paper that gets me thinking more about future questions I’d like to answer, because it’s so chock full of interesting little tidbits. Read the appendix on Facial Action Coding – it’s another cool example of the qualitative turning quantitative.

I’m loving that economics research includes qualitative stuff like emotions and facial expressions and other such nebulous concepts. One would think we’re so grounded in our f-stats and our p-vals that we wouldn’t care to explore these things, but with a little bit of digging, they too can be turned into usable variables that add not just explanatory power, but a distinctive ‘cool’ factor to research.


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